Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

Sustainability was one of the most popular investment themes of 2020. Focusing on environmental, social and governance factors when choosing an investment is no longer a nice-to-have or niche concern. It’s become a mainstream investment approach - and for good reason.

Analysis by Fidelity’s investment team has shown a clear link between sustainability and stock market performance. Read more about the link between ESG and price performance here.

So, it’s not surprising that when I started putting together my fund picks for 2021, ESG was in the spotlight.

Our Select 50 list of preferred funds has a few funds with a clear and explicit focus on sustainability. Three of them make it into my picks this year.

The Brown Advisory US Sustainable Growth Fund invests in businesses with a sustainable business advantage. It holds a relatively concentrated portfolio of 30-40 stocks. The managers have a strong valuation discipline, which prevents them paying over the odds, an important consideration as the US market continues to hit new highs.

Some of the shares held in the fund will be familiar to investors. Microsoft, Amazon and Google-owner Alphabet are among the biggest holdings.

Others will be less well-known. UnitedHealth, Thermo Fisher Scientific and IDEXX Laboratories are big contributors to the fund that may be new names.

The team invests on a 3-5 year view and investors may require the same sort of patience because this fund will not perform in all market conditions. It will tend to lag at times of strong economic growth so it might balance more cyclical funds in a diversified portfolio. For investors looking for a growth fund with an ESG tilt, however, the long and rigorous approach to quizzing companies on their sustainability approach may appeal.

With many investors looking to emerging markets to outperform in 2021, the second sustainability-focused fund in the picks may be worth a look.

The Stewart Investors Asia Pacific Leaders Sustainability Fund looks for companies that contribute to, and benefit from, economically and environmentally sustainable development.

Each of the investments in the portfolio can demonstrate a high degree of ‘social usefulness’ - in other words, they provide goods or services that society actually needs. This is good for development, and it makes the portfolio resilient in the face of change.

The Stewart fund has a long track record of investing in this way. It aims to protect investors from the greater potential volatility in emerging markets by investing in mainly large and mid-capitalisation shares.

The third sustainable fund pick is less explicitly focused on ESG. The Foresight UK Infrastructure Income Fund is, as its name suggests, all about delivering yield in a low interest rate world. Increasingly, that is a tall order with traditional sources of income like bonds failing to deliver. Investors have been forced to look further afield and alternative investments like infrastructure are top of the list.

The Foresight fund invests in other investment companies that own real assets in the renewable energy and infrastructure sectors. It’s this focus on cleaner energy that will make it attractive to sustainability focused investors. That and the targeted 5% annual income, although this is not guaranteed, of course.

Renewable infrastructure is a very attractive asset class in a world that is attempting to ‘build back better’ from the pandemic. With governments keen to use their spending power to supplement central bank stimulus, this could be a powerful growth driver in the years ahead.

For many investors, doing the right thing with their money while achieving good returns on their investments is the holy grail. Hopefully, these ideas will be a good starting point.

More on Sustainable and ESG investing

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

Topics Covered:

Funds; Investing for income; Asia and EM; North America; ESG Investments

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